By Esther Kowa
This advice might not work for others (lending institutions and interest rates differ) but it works for me.
Like I mentioned, it’s one of the perks of being a civil servant. I sleep peacefully knowing that no one will come and knock on my door to ask for their money back, the bank will deduct from my payslip. Even if I were to die with the uncleared loan, the bank won’t come and trouble my family, because insurance will cover that.
Many business owners want to pay back their loans as quickly as possible in an effort to become debt free. Again, it’s important to reduce debt, but doing so too quickly can cost your business.
That’s because you may leave yourself short of cash. Or the extra money you’re devoting to debt reduction might be better spent on profitable growth projects.
Let’s say I have a K70,000 cash available and my loan balance is K50,000. Others may rush to clear off the K50,000 thus remaining with a K20,000 in their business account. Now, if I were to pump K50,000 back into my business, I know I will get 100% profit in a space of 3 to 6 months if business is good.
It is prudent that I compare my projected return on an investment to how much interest I am saving by paying down my loan faster than required.
If you expect to earn more investing the money in your business, consider slowing down your repayment pace. I can either clear off my loan and remain with little cash or grow the money.
I choose to grow the money. They can continue deducting for as long as they want.
Kalemba January 2, 2024